FInal

Re=ru+(D/E)(ru)(1-T) 13.04=ru+(0.64)(ru-.08)(1-.35) ru=11.56%

A firm has a debt-equity ratio of 0.64, a cost of equity of 13.04%, and cost of debt of 8%. The corporate tax rate is 35%. What would be the cost of equity if the firm were all-equity financed?

price/share=17,800/5000=3.56 shares after repurchase=5000-(1000/3.56)=4719 EPS=31200/4179=$6.61

A firm has a market value equal to its book value, excess cash of $1000, and equity worth $17,800. The firm has 5,000 shares of stock outstanding and net income of $31,200. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase?

(.47/1.47)(0)+(1/1.47)(1.2) =0.816

A firm has an equity beta of 1.2, the risk-free rate of return is 3.4%, the market return is 15.7%, and the pretax cost of debt is 9.4%. The debt-equity ratio is .47. If you apply the common beta assumptions, what is the firm's asset beta?

yielded a higher return than expected for the level of risk assumed

A stock with an actual return that lies above the security market line has

if an unsatisfied clientele group exists

According to the clientele effect, firms can only boost their stock price:

The firm's financing needs

According to the pecking-order theory, a firm's leverage ratio is determined by:

a decrease in the tax rate

All else held constant, which one of these is the most apt to increase the WACC of a leveraged firm?

VL=[(138,000 x (1-0.34)]/0.136 +(0.34 x 520,00) =846,505.88

An unlevered firm has a cost of capital of 13.6% and earnings before interest and taxes of $138,000. A levered firm with the same operations and assets has both a book value and a face value of debt of %520,000 with an annual coupon of 7%. The applicable tax rate is 34%. What is the value of the levered firm?

total, systematic

As we add more diverse securities to a portfolio, the ___ risk of the portfolio will decrease while the ____ will not.

expected payment=(prob well)(payment well) + (prob poor)(payment poor) =(0.5)(35)+(0.5)(20)=27.50 $promised return=27.5-25.5=$2 %promised return=(2/25.5)*100=7.8%

Assume a firm's debtholders are promised payments in one year of $35 if the firm does well and $20 if the the firm does poorly. There is a 50/50 chance of the firm doing well or poorly. If bondholders are willing to pay $25.50, what is the promised return to those bondholders?

shareholder income=$5 x (0.40) x (1-0.34) x (1-0.10) =$1.188

Assume the corporate tax rate is 34%, the personal tax rate on interest income is 15% and the personal tax rate on dividends is 10%. If the firm earns $5 per share in taxable income and pays out 40% of its earnings, how much will a shareholder receive in aftertax income?

300 x (0.5)=15 15 +300=315

Assume you own 300 shares of ABC stock and receive a stock dividend of 5%. As a result, the number of shares you own will change to ___ shares while your total wealth will increase by ___ %.

(.148)(.25)+(0.63)(.55)+(-0.47*0.2) =0.0623 6.23%

BPJ stock is expected to earn 14.8% in a recession, 6.3% in a normal economy, and lose 4.7% percent in a booming economy. The probability of a boom is 20% while the proability of a normal economy is 55%. What is the expected rate of return on this stock?

par value: $1 x 5/1

Edie's Healthy supply has 125,000 shares of stock outstanding with a par value of $1 per share and a market value of $5 a share. The company has a retained earnings of $76,500 and capital in excess of par of $340,000. The company just announced a 1-for 5 reverse stock split. What will be the par vale per share after the split?

maintaining a consistent dividend policy

Financial executives place the greatest importance on which one of these factors when setting dividend policy?

leverage does affect the value of the firm

MM proposition I without taxes proposes that:

A firm's cost of equity capital is a positive linear function the firm's capital structure

MM proposition II is the proposition that

total $ return=(selling price-buying price +total div)/buying price buying price=32.50 selling price=34.60 div total=0.4(4)=1.6 (34.6-32.5 +1.6)/32.50=11% (34.6-32.5+1.6)=$3.70

One year ago, you purchased a stock at a price of $32.50. The stock pays quarterly dividends of $0.40 per share. Today, the stock is worth $34.60 per share. What is the total dollar return per share to date from this investment?

common stock=105,000x22=2,310,000 preferred stock=25,000x45=1,1,25,000 debt=1,500,000x.98=1,470,000 Total MV-2,310,000+1,1,25,000+1,470,000=4,905,000 debt=1,500,00/4,905,000=29.97% PS=1,125,000/4,905,000=22.94% CS=2,310,000/4,905,000=47.09% WACC=(29.97x7.8)(1-34%)+(22.94x8)+(47.09x12.4) =9.218%

Peter's audio has a yield to maturity on its debt of 7.8%, a cost of equity of 12.4%, and cost of preferred stock of 8%. The firm has 105,000 shares of common stock outstanding at a market price of $22 a share. There are 25,000 shares of preferred stock outstanding at a market price of $45 a share. The bond issue has a total face value of $1.5 million and sells at 98% of face value. If the tax rate is 34%, what is the weighted average cost of capital?

geometric

The average compound return earned per year over a multi-year period is called the ___ average return

0.82x120,000=98,400 decrease in retained earnings

The cameron co. is paying a dividend of $0.82 a share today. There are 120,000 shares outstanding with a par value of $1 per share. As a a result of this dividend, the:

a higher variability of EPS with debt than with all-equity financing

The increase in risk to shareholders when financial leverage is introduced is best evidenced by:

causes stockholders to increase their expectations of future cash flows

The information content effect implies that stock prices will rise when dividends are increased provided that the dividend increases:

the net cost of debt to a firm is generally less than the cost of equity

The interest tax shield is a key reason why:

debt-equity ratio selected results in the lowest possible weighted average cost of capital

The optimal capital structure has been achieved when the:

eliminate asset-specific risk

The primary purpose of portfolio diversification is to

the acceptance of too many high-risk projects and rejection of too many low risk projects

The problem that results from using the overall firm's beta in discounting projects of differing risk levels is the:

0=(1/1.45)(0.095)+(.45/1.45)(0.066) =8.6%

The upper tier has a current debt-equity ratio of .52 and a target debt-equity ratio of .45. The cost of floating equity is 9.5% and the flotation cost of debt is 6.6.%. What should the firm use as their weighted average flotation cost?

the overall rate which the firm must earn on its existing assets to maintain its value

The weighted average cost of capital for a firm is the

E(r)boom= (0.40)(0.18)+(0.60)(09)=0.126 E(r)normal=(0.40)(0.09)+(0.6)(.05)=0.066 E(r)portfolio=(0.25)(0.126)+(0.75)(0.066)=0.081 SD={[(.25) x (0.126-0.081)^2]+[(0.75) x (0.066-0.081)^2]}^0.5 =2.6%

There is a 25% probability the economy will boom; otherwise, it will be normal. Stock Q is expected to return 18% in a boom and 9% otherwise. Stock R is expected to return 9% in a boom and 5% otherwise. What is the standard deviation of a portfolio that is invested 40% in Stock Q and 60 percent in Stock R?

firm value=(74,000/21000)*40,000 =1,409,524

Uptown Interior Designs is an ell-equity firm that has 40,000 shares of stock outstanding. The company has decided to borrow $74,000 to buy out the 2,100 shares of a deceased stockholder. What is the total value of this firm if you ignore taxes?

arithmetic=(0.04+0.09-0.06+0.18)/4 =6.25% geometric=(1.04x1.09 x -1.06x1.18)^0.25 -1 =5.89%

What are the arithmetic and geometric average returns for a stock with annual returns of 4%, 9%, -6%, and 18%?

Dividends are frequently taxed as ordinary income

Which is a con of paying dividends?

the federal reserve increases interest rates

Which is the best example of systematic risk?

small-company stocks, large-company stocks, long-term corporate bonds

Which one is a correct ranking of securities based on their volatility over the period of 1926 to 2014? Rank from highest to lowest.

furnishing financial statement to the firm's lenders

Which one of these is most related to a positive covenant?

1.1=(100/800)1.4 + (300/800).6 + (x)(1.6) x=44% $50

You desire a portfolio beta of 1.1 Currently, your portfolio consists of $100 invested in Stock A with a beta 1.4 and $300 in Stock B with a beta of 0.6. You have another $400 to invest and want to divide it between Stock C with a beta of 1.6 and a risk-free asset. How much should you invest in the risk-free asset to obtain your desired beta?

(2.1/1.145)+[1/(1.145)^2)] 29.64

You own 300 shares of abco stock. The firm plans on issuing a dividend of $2.10 a share one year from today and then issuing a final liquidating dividend of $36.45 a share two years from today. Your required rate of return is 14.5%. Ignoring taxes, what is the value of one share of this stock to you today?

stay fixed-leaving more income to be distributed over fewer shares.

when comparing levered vs unlevered capital structures, leverage works to increase EPS @ high levels of EBIT b/c interest payments on debt

The standard deviation of a portfolio can often be lowered by changing the weights of the securities in the portfolio

which one of the following statements is correct concerning the standard deviation of a portfolio?